How Data Centers Emerge To Be A New Asset Class For Retail Investors?

In today's rapidly evolving digital surroundings, investors are in search of progressive approaches to diversify their portfolios and attain stronger returns. 'Data centers' that have given a significant boost to the technological capabilities of our country, have now emerged as a preferred asset class amongst investors.

Diverse Investor Profiles with a Global Appeal

Data center investments have emerged as a magnet for investors across the globe who are seeking to harness the speedy expansion of the digital economy. Remarkably, this interest spans a diverse range of investor backgrounds. Currently, there has been a tremendous surge in investor interest in data centers, leading to a huge increase in the ones diversifying their portfolios through fractional ownership of those assets.

This trend highlights the growing recognition of data centers as resilient and excessive-yielding assets in the commercial real estate landscape. India is also anticipated to be a part of this growth story with its data center capacity set to double by the end of 2025, totalling up to 20 million sq.ft., growing at a CAGR of 21%. Capacity is estimated to increase 1078 MW by 2025, and the industry will attract additional investments of USD 4.8 billion over the next 3 years.

Data centers provide investors with a unique blend of stable rental earnings and promising capital appreciation potential. As digital technology continues to advance, data centers not only remain crucial but also present lucrative opportunities. Investors engaged in fractional ownership can enjoy consistent income while witnessing their investments progressively recognised over time.

Key Benefits of Data Center Investments

Yield Income and Long Lock in the period from tenant

Data center investments offer an attractive proposition for investors looking for reliable cash flow and strong growth. With moderate costs, investors can expect a rental yield of 7% to 8%. This stable and consistent revenue stream makes data centers an attractive option for revenue-focused investors. In addition to immediate income, data centers entail a prolonged commitment due to their substantial upfront infrastructure expenses and the frequent necessity for tailored solutions to meet the unique demands of their clients.

Resilience in Market Dynamics and Strategic Digital Positioning

In today's dynamic digital panorama, data centers show exquisite resilience. Unlike conventional actual property sectors susceptible to economic fluctuations, data centers preserve consistent demand, offering investors stability in returns amidst market volatility. Moreover, making an investment in data centers, strategically positions investors at the forefront of the digital economy. These facilities function as the backbone of the information-driven world, facilitating seamless online experiences, cloud computing, and records storage. As data consumption increases with emerging technologies, data center investments provide a gateway to the heart of technological advancement.
Diversification and Risk Mitigation

Diversification is the cornerstone of prudent investing. Data centers pose unique opportunities for diversification in commercial real estate. By adding data centers to their portfolios, investors can reduce market-specific risks associated with other asset classes. This strategy increases the stability of the portfolios and allows investors to better navigate different market conditions.

Evolving Regulatory and Environmental Considerations

The data center industry's focus on sustainability and energy efficiency is in line with evolving societal and government priorities. Investing in energy-efficient data centers not only contributes to a greener future but also positions investors in a changing regulatory environment, potentially increasing the investment's long-term value.
To entice investment and accelerate India's current rate of data center expansion, the Indian government is formulating a data center policy. Incorporating data centers under the Essential Services Maintenance Act (ESMA), creating Data Centre Facilitation Units (DCFU), creating Data Centre Economic Zones, and creating a special category code for data centers under the National Building Code of India are all part of this plan. (Source- Link)
While data centers offer significant advantages, we are also of the opinion that prudent investors should also consider diversifying their portfolios further.

Diversifying Beyond Data Centers

Two noteworthy areas for diversification are warehouses and office spaces.

Why Warehouses?

Warehouses play a vital role in the logistics and supply chain industry, especially in the generation of e-commerce. The demand for well-placed warehouses has been gradually developing as online buying and same-day delivery have become the norm. Investing in warehouses can offer investors a stable income stream from rental payments, and the boom of e-commerce guarantees a favourable lengthy- outlook for this asset class. The requirement for high-quality warehouse space, increase in automation, and ongoing demand driven by e-commerce and 3PL have contributed to the robust expansion of investments in the warehousing and logistics space. Demand for warehousing space has increased, with a record-breaking net absorption of 42.5 Mn SF in 2022. Overall supply is expected to grow to 500 Mn SF by 2025 from 316 Mn SF in Q3'22, at a CAGR of 15.4%.

Why Office Spaces?

In India, there are around 800 million sq. ft. of Grade A office spaces, and their demand has been growing steadily. There was a 40% Y-o-Y growth in office leasing in 2022. 1/3rd of the office demand space in APAC is driven by India. India witnessed 56.6 Mn SF of absorption and 50.6 Mn SF of supply in 2022. Net absorption of Grade-A office spaces across the top 7 cities reached a 3-year high in 2022, at 38.25 Mn sf in 2022 a 43% increase from 26.8 million sf in 2021. With the expansion of agencies and the upward push of startups, the need for quality office spaces is on the rise. Investing in office spaces can offer an aggregate of rental earnings and potential for capital appreciation, making it a valuable addition to a diversified investment portfolio.

In conclusion, data centers are not only the future of the digital age but they are also poised to play a considerable role in intelligent investment strategies. Their advantages make them a compelling asset class for retail investors seeking to secure their financial future. Prudent investors who are looking to make the most of the commercial real estate space in India should consider data centers as a part of their portfolio but also diversify across warehouses and office spaces to further enhance their portfolio's resilience and ability for long-term growth. Source: link

The views and opinions stated in the content belong to Shiv Parekh, Founder & CEO, hBits.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.